Abstract
This document presents the macroeconomic staff forecast formulated by the Bank of Israel Research Department in October 2026 concerning the main macroeconomic variables—GDP, inflation, and the interest rate.[1] According to the baseline scenario, GDP excluding production abroad (which, in our assessment, better represents economic activity, see the box at the end of this document) is expected to grow by 3.4 percent in 2026 and by 5.1 percent in 2027. The inflation rate in the coming four quarters (ending in the third quarter of 2027) is expected to be 2.0 percent. Annual inflation in 2026 is expected to be 1.5 percent, and annual inflation in 2027 is expected to be 2.1 percent. The average interest rate in the third quarter of 2027 is expected to be 3.0 percent. The state budget deficit is expected to be 4.4 percent of GDP in 2026, and 4.6 percent of GDP in 2027.
The current period is characterized by a high level of uncertainty regarding a great number of parameters that may have a marked impact on the economy. The forecast is based on working assumptions that the intensity of the fighting will remain low, similar to the current level, in a way that somewhat eases the supply constraints in the economy, and that the geopolitical environment will remain tense. The forecast does not take into account the potential impact of the upcoming Israeli elections on the economy.
On the basis of these assumptions and additional assessments that will be detailed below, the forecast reflects continued convergence of GDP (excluding production abroad) toward the prewar trend, in parallel with a recovery of employment in the economy. However, even at the end of the forecast horizon (end of 2027), GDP is expected to remain below the trend line, since the supply of workers is still expected to be lower than the level derived from the prewar participation rates. In parallel, inflation is expected to become entrenched around the midpoint of the target range.
The forecast
The Bank of Israel Research Department compiles a quarterly staff forecast of macroeconomic developments based on several models, various data sources, and assessments based on economists’ judgment. The Bank’s DSGE (Dynamic Stochastic General Equilibrium) models—structural models developed in the Research Department and based on microeconomic foundations—play a prime role in formulating the macroeconomic forecast. The models provide a framework for analyzing the forces that have an effect on the economy, and allow information from various sources to be combined into a macroeconomic forecast of real and nominal variables, with an internally consistent “economic story”. The models also help analyze scenarios and policy alternatives, and thereby support the formulation of policy under uncertain conditions.
[1] The forecast was presented to the Bank of Israel Monetary Committee on October 20, 2026, prior to the decision on the interest rate made on October 21, 2026.